Kimmeridge: U.S. shale drillers “well prepared” to manage potential credit crisis

Gerson Freitas Jr. and David Wethe, Bloomberg March 17, 2023

(Bloomberg) – U.S. shale explorers are well prepared to manage a potential credit crisis after piling up cash and paying down most of their debt, according to private equity firm Kimmeridge Energy Management Co.

“I don’t think the upstream business has ever been in better position for a downturn than it is today,” Kimmeridge managing partner Ben Dell said in an interview. “We’re heading to being essentially debt-free as an industry.”

The shale industry has historically been heavily reliant on loans secured by their oil and gas assets, stoking concern that the turmoil engulfing the banking sector will cut off drillers’ access to credit. Fears of a recession, meanwhile, are weighing on fuel prices and threatened to erode profits after a two-year bonanza.

But shale drillers have made a strategic shift in recent years from reckless spending and unchecked output growth to strict capital discipline. The new business model could help shield the industry from the fallout of a credit crunch.

“When oil went to $130, we were kind of impressed by the level of discipline the companies held,” Dell said. “As you’ve seen commodities come down, we were pretty impressed by the reaction from operators in terms of being rational and dropping rigs and focusing on profitability.”

Kimmeridge holds stakes in publicly traded oil and gas producers including Civitas Resources Inc. and Chesapeake Energy Corp. It’s also the owner of Titan Exploration LLC in Wyoming.

Dell, who was an exploration geologist and geophysicist at BP Plc before founding Kimmeridge in 2012, expects oil from U.S. shale to grow by less than 250,000 bbl this year. That’s down by about 100,000 bbl from the level he would have predicted a few months ago, he said.

Record costs from a shortage of labor and supply-chain snarls are contributing to a slowdown in production growth from the U.S. shale patch. Explorers are also running out of top—tier acreage. In recent weeks, some of the biggest U.S. oil companies have reaffirmed plans to keep growth low this year.

“If you grow, you accelerate your inventory problem,” Dell said. “Until capital comes into the space, until multiples expand, there’s actually no real incentive to grow.”

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